In episode 2 of Build With Billd, Chris Doyle sits down with Levelset’s CEO Scott Wolfe for a discussion about managing cashflow during a crisis. Chris and Scott dive into some of the short term and long term impacts that are going to take place in construction as a result of COVID-19. They also share advice on how our industry can work to combat common issues during these challenging times.

Built with Billd (1)Transcription: 

 

Chris: Hello, thank you all for joining the Built with Billd podcast. Today we're sitting down with the founder and CEO Scott Wolfe. Scott, how are you doing?

Scott: Great, Chris. Thanks for having me today.

Chris: Yeah, as you know, we're a big fan and a customer of Levelset. Totally love the platform and team. So actually, why don't you give a quick intro on what level set does before we started?

Scott: Sure, no problem. So yeah, as you know, and everybody who's listening probably knows that stretch cash, cash flow getting paid is an enormous stressor in the construction industry for contractors. And what we're built on and our mission is that we are there to empower contractors across the world to get what they earn, always be able to get what they earn. And when we do that we have a ton of education and knowledge we connect people to expert help, and the backbone of Levelset as a platform that makes payment and lien rights easy. 

Chris: Yeah. Well, you know, we're in some pretty interesting times right now, knee deep and the COVID error and this has certainly had a huge effect on the global economy and certainly our customers and construction. So I want to start off with a question on just you know, what are your customers biggest concerns in the short term in the next current month, the next few months? What are you hearing from your customers right now?

Scott: It's interesting because this is so, so strange and sudden, the way the market is changed, like we're seeing today. Levelset actually was founded in the housing crisis. We had a lot of these things that seem familiar now. But what's unfamiliar is just how sudden and unpredictable and uncertain things are. And you see, and what we see from our customers is kind of a lot of shellshock, around that where they don't have very much to understand what's going to happen. They're seeing projects get delayed, they have issues getting people out to the job, cash is being tightened from like all angles.

Chris: Yeah. 

Scott: And so there's a lot of shellshock feeling amongst the customers and not knowing what to do or what's going to come next. And I would say that kind of is their sentiment and their concern. It always boils down to cash, like how much cash can they get to come in the door through business that they're getting. And then after they acquire the business after they do the work, then it's about actually getting the cash to actually arrive in a bank account. And both of those things are definitely on their mind right now,for good reason. 

Chris. Yeah. You mentioned cash tightening. So that's really two approaches. One is, we don't really see that happening at the GC level where they get paid on a project and they just hold it. Yeah, I don't think I've ever really seen that. But from a developer and property owner standpoint, have you seen that cash tightening where they say, Hey, we're all in working order, but we're just gonna like, sit back for a second and breathe and make sure you know, before we release this next draw or what have you? 

Scott: Yeah,for sure. In different ways, like it sometimes is by the fact that they're affected. Right? So if you're doing work on a hotel, we have customers who are doing work on hotels or restaurants that have these kinds of commercial jobs or state governments where literally the government agency just shut down. Yeah. That's a problem. Like that's a real problem of cash can't come like they can't pay. The project can't go on. Then you have the eggshell walkers where they just don't know what to do in the same way. And so they kind of freezes up money.

Chris: And they say, what's the harm if I freeze for 30 days? Right? And it’s a huge harm, but that that's from their mentality, they're going well, let me mitigate my own risk and in 30 days.

Scott: Yeah, that's kind of what the whole construction payment fiasco is all about this fear of I want to protect myself again. My own risk, I have a thing that I always say, which is that no one walks onto a job and says, I can't wait to slow pay on this project. You know, I can't wait to screw these contractors. Yeah, but unlike other situations, like nobody says, I want to make sure that the painters come before the drywall people get there. Wouldn't that be funny? Yeah. Everybody says that.

Chris: Yeah I hope I lose money on this project.

Scott: Right? Right. Everybody works together to get the job done. Right. But then everybody wants to protect themselves against everybody else. With respect to cash, and it's exasperated right now because there's so much of a risk.

Chris: Yeah. Well, so let's take that to a different angle from a contractor standpoint. So there might be some cash tightening there. And when I mean that, maybe they don't have the cash and now they've got an operating business. They've got full time employees. They've got workers that are potentially on salary. What have you guys seen? Or I guess what insight can you provide on what some of these in and I don't even want to say smaller because a smaller, probably or even more flexible, but all contractors, they're in a spot where they can't earn what they would otherwise be earning and what do they do with their, their skilled workforce during this time?

Scott: Yeah, I have a one of our customers who is a GC, they actually are in New Orleans. And I know them because I'm in New Orleans, so I know them personally. And they stopped working, because they didn't want to put their employees at risk. There's a whole nother twist on this, which is not only you know, now they're making affirmative choices to stop work for safety. 

Chris: Mm hmm. 

Scott: And there was an article that came out today about this actually, about how contractors out on the jobsite, even if they're quote or unquote essential, are seeing safety concerns. So, you know, I think the question was along the lines of what, what are we seeing with respect to how money is coming in?

Chris: Well, it's really if you're not going to work, and you don't have the cash, what do you do? Yeah, what do you do? Do you know? I think the obvious answer, and by the way, my position on this, and it's certainly not anti worker by any means, but the best thing any business can do is keep the business alive. If the business survives, is going to hire the workers back, but it doesn't then you know, they're off on their own anyway. So it certainly has some tough decisions, but there are some options to write and what you can do with your workforce in the interim, especially, it's only maybe a two or three week delay.

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Scott: And there's a lot of government benefits right now that are trying to help ease some of that burden of what to do with the workforce when you don't necessarily have the money coming in.  But you know, to be honest, my background is I've been doing this Levelset thing for 12-13 years, something crazy like that. I've been a construction attorney and I’ve dealt with a lot of construction disputes, a lot of situations, a lot of different environments. And this is the biggest Rubik's cube that I've ever encountered. Because there really are very few good answers for a situation when you if you do have work, you might have to put your workforce out at risk. If you don't have work, you still have contractual obligations and these things and delays cost money. And will the job be there later on? And the money that I have out on the street. You asked originally, your first question was like what are some of the short term concerns? I would think about it like, well, number one, I have money on the street. This is work that I did and construction is unique. Here's work that I did. I was owed this money. I was expecting this money. It's on the street. How do I get it? Make sure that I get it. Yeah. Then I have money that I'm expecting to one day be entitled to after I'd do the work. 

Chris: Yeah, you're right. You've got the contracts, let you get your submittals done. You're all teed up, which is sometimes a lot of the work and maybe engineer it. Things like that. 

Scott: Yeah,yeah. So what do I do about that stuff? And then what do I do? What does my future look like from where I was? I had all these employees. And I was planning to make all this money. Well, now what's gonna happen to my plan? And how do I right size my ship to sail in this new ocean? Yeah, versus the one that I was expecting. And so you have all those balls in the air and the kicker is that no one knows what's going on. What’s going to happen for the next 30 days or 90 days, 100 days? You can't even, you can't even model it. 

Chris: It's really shifting. Go right back to normal in 60 days. Is it going to be very long as it relates to construction? Is it going to be a very long process to get projects kick started? Those are huge questions. 

Scott: And is the news about to get tighter? One of the interesting things about construction is that I think based on what I'm seeing with customers, I think we did a survey of our users and there's something like a 20% affected rate.

Chris: Yeah, is that by project?

Scott: Yeah by project by project. 

Chris: That's really low.

Scott: Right. So I think about this as like alright restaurants at full stop. They got completely turned down. Is the news just tighter around construction? We actually have a tightening that we're going to see over the next two months, that's going to make it worse on the industry than it already has been. The industry has actually escaped some already. I mean, that is a version of the world that could certainly happen. I don't know. I'm no expert, but it certainly could happen. It just depends on what happens with the pandemic and how it continues the longer that we locked down. The more the news is going to tighten. And that's a problem.

Chris: So that 20% that's not like, you know, one contractor has all their projects on hold, or one contractor has zero. It's always a balance. So one thing that we've seen is we have customers coming in and saying, let's say they have four projects going, two of them are shut down. They're like I'm going crazy on these other two I'm going as fast as I can, because I double up right and I doubled up. I put all my workers on them. So projects are actually going very quickly. So it puts an additional strain because they're saying, I need more materials than I otherwise would. Which brings me to my next question, which is, you know, we haven't talked about suppliers, material suppliers. Where do you think they fit in all of this? Because they've got a few problems. They've got the pricing and availability issue. Yeah, that may not be immediate, but it's certainly going to be long term, but also their own kind of credit and policy and talk about a cash tightening, you know, they may come back and say, hey, look, I'm not going to be the one that gets stuck on this. So I am not going to be as willing to provide terms. Have you seen any of that from your supplier customers? 

Scott: Oh, yeah. And this is where it looks a lot like the housing crisis. With the suppliers, you know, after the housing crisis, and even now we see suppliers coming through the door, saying like, we're not going to be caught with our pants down, you know? Like their customers, all their subcontractors are having all these cash problems and suppliers don't wanna be left with that bag. And certainly, if a high percentage of their subcontractors are in a completely different economic state, well, then that's a big problem for them because they have a lot of credit out there with these companies.So we're seeing a rush from suppliers towards security on those jobs, like a lot of lien filing. A lot a lot of of extra precautions with respect to making sure that jobs are in a good position here and then you know, they are getting a lot more tight about how much credit they give to customers and understanding their whole credit issue in model is is now, you know, flipped upside down a little bit that they have to give it a little bit of attention. I was gonna add about the lien violence like we also we monitor the lien filings all over the country in addition to the ones that we file a lot of liens and you can see in this states with lock downs there's a dramatic increase in filings. Yeah. And and it's in proportion to how long they've been in lockdown. So Washington is leading the country where the filings are like 140% then, and that's a lot.

Chris: Wow. 

Scott: Yeah. And then it trickles down to some of the other states like New York, Michigan, Arizona, etc. It's up like 50%. And then it gets you know, there's a little bit of a tail, but it's, it's an example of there's a lot of money out on the street right now. Suppliers put a lot of that money out. 

Chris: Yeah. Through credit. 

Scott: That's credit. Right. And the credit world is in a state of paralysis right now. Yeah, like Zillow. So if you look at if you get outside of credit, you look at Zillow, and an open door, these two companies were surging ahead to buy houses. Right? So they would flip these houses and all of a sudden, they both stopped cold not buying houses. Because you can't figure out what's going to happen with the housing market. Yeah, yeah. And it's the same thing here, you have to stop issuing credit. Because you can't figure out what's gonna happen with all these subcontractors who’s businesses are shutting down.

Chris: And so they're, you know, from their perspective, they're going, Hey, I want to sell to you, but to my point earlier, my business must survive this. 

Scott: Yeah.

Chris: That's the only thing I can do. And if I lose a customer, then I'm just gonna have to get them back later because I can't just I can't take that risk.

Scott: Yeah, for sure. Suppliers would love to skip to sell as many suppliers as possible to subcontractors.

Chris: Yeah, cash up front.

Scott: right. Oh, gosh, I probably would be better.

Chris: So, I'm gonna guess. I mean, your team will encourage both suppliers and contractors right now right? I mean, even proactively, if you have some time, go ahead and get those in right to make sure that you're covered and just let everyone in the project know, this is who we are. This is how much were owed. And you know if there's any confusion this is it. Right? We're, we're officially in even if, let's say notices are due for another 60-90 days.

Scott: Yeah. In the best of times, general contract contractors, and suppliers should always be sending notices. And this is a great example for why you need it as a backstop. Right, this is a textbook for why you need it as a backstop because if you didn't send notice you could be really holding a lot of risk right now that you didn't need to there was no reason. Yeah, just sent your notices all along, all that risk goes away. The other thing it does is when in the best of times, it helps payment come faster, because all the parties know hey, this is the contract and this on the job. I know how to pay this person. So it's the best of both worlds. 

Chris: By the way we've been on the like the preliminary notices far exceed from a payment cycle is not even a lien you know always that does it. If you're not sending preliminary notice or no sentiment whatever is required by the state. Then you got to do that. I don't care  who you are, you gotta do it. 

Scott: You're getting paid slower. We see it where like the payment speeds are double it takes double as long to get paid. Yeah, if you do simply send the notice.

Chris: Yeah, you can’t have that right now.

Scott: Right? We shouldn't have that no one.

Chris:  Absolutely, yeah.

Scott: And one of the reasons is instruction. So interesting because when you go on a project, you join a community of companies. And even though you only sign the contract with one person in the community, your money is affected by everybody in the community. Yeah, and how they perform and who's having cash problems. And when you send a notice what you're doing is you're helping connect that community a little bit better, so that people know who everyone is, and that smoothens payment. And then this is, like I said, a textbook example of how something that has nothing to do with you, and nothing to do with your great relationships on the job. This something that's completely out of the blue is going to impact your bottom line. And a notice is an insulator against that.

Chris: Yeah, I think that's a big perception change that the industry needs to have is that you know, I was a commercial sub for five or six years. And I don't remember the sensitivity around notices as much as we've seen recently, not in the times we're in right now in the last 60 days. But the industry has got to understand that this is part of construction DNA is a statutory lien rights, and that this isn't an insult. This isn't you're not paying your bills. This is like you said, it's your notice that you're a part of a community. And if you don't do it, project owner, this is even to your benefit, and the general contractors benefit. Right? You can generally sniff these out quickly if they're wrong, right and I don't think I've heard much from anyone that you have just fraudulent liens being filed or notices being filed, but it's really everyone's responsibility to participate in that. And these project owners and GCS should understand and really respect that there are subcontractors protecting their business, and not all the whole well, we've been working a long time together. Why are you sending this notice? Like, hey, I'm protecting my business so I can do the job and your project and do a good job here and on the next one.

Scott: Right. And it's not even about you. It's about what could happen that is out of your hands? Yeah. To give a little history lesson. The most one of the most interesting things about the notice is with respect to the sensitivity, is that the reason why notices exist, is because the owners and the general contractors have heavily lobbied to get them. So if you think about a world without notices, the mechanic's lien and the lien, right, was invented by Thomas Jefferson. It's the first labor law of all time. Okay. Right, and there's no getting around it everywhere you go. Everybody who provides materials or labor to a job everywhere is entitled to be paid just as short as you're entitled to be paid at your company. Right now, what happens when you're on a job in a state like New York that doesn't have preliminary notices by rule, and all of a sudden this lumber company shows up and files a lien and the owner doesn't know that the lumber company was even there? Yeah. Now that that's kind of unfair to the owner. So the owner goes and starts to lobby and say these lien laws are ridiculous. People are filing liens, and I don't even know they're there. You need them to send me a notice.

Chris: Yeah tell me up front.

Scott: Yeah. 

Chris: Days matter and weeks matter on these projects, when you're releasing funds. And if you don't find out to the end, and you've already paid out your your budget...

Scott: Exactly. So the notice is a service to the owner. It protects the supplier. It protects the contractor, because it's required to be done. But as a service to the owner, this is why projects that get noticed go faster because they make it smoother and help it. It's the only way, unfortunately, that the industry has to figure out who's on the job. 

Chris: Yeah.Well, let me Scott, let me ask you a Harvard question, one quick Harvard question. And this is a tough one, you know, what do you think? How do you think this long term plays out? What do you think the long term are?

Scott: I think it's easier actually than the short term ones because the short term ones, no one knows how long the short term is gonna be and how crazy it's gonna be.

Chris: Sure. Yeah.

Scott: There's a few things that I think will happen. One is, there is definitely a ripple effect of this that we know we're going to be in some sort of recession type economy now. And everybody, just like after the housing crisis, there'll be some specific nuances. But just like then in every other recession, you start to see a lot of protectionism. So, the word I use is like protectionism on steroids. I think that we're going to see a lot of protectionist actions by people over a longer term. And that's gonna take years for that to be erased from the industry's memory before we get back. 

Chris: You mean from everyone, like the banks, the property owners, the government, the contract. 

Scott: Yeah, sure. And that'll make, you know, a lot more notices and lien waivers and from my business standpoint, a lot more notices lien waivers, a lot stricter credit terms, a lot of like all that stuff is going to those screws are going to tighten. They're going to be really tight at first, and it's gonna take a while for them to get loose. I think we have a dispute which I would also call like a dispute resolution nightmare on our hands, that has not reared its head yet. But this has impacted gazillions of jobs around the world. And the legal mess and the financial mess of what's going on right now and who's responsible for what. I think there's a dispute resolution nightmare that like it's going to keep the lawyers very busy. Yeah. And that is going to impact people's businesses, and their cash and their and their survival, their ability to survive. I think that's definitely a long term thing too.

Chris: And that's screams inefficiency, right? You've got probably too half a cup, too much of attorneys. Half a cup, too little of cash and a cup too much concern and worry.

Scott: And it feeds itself.

Chris: Yeah.

Scott: Like all those things connect and create more fear, uncertainty and doubt and protection. And so if you want us to, you know, if you want to breathe the oxygen in the next year or two years, you're gonna have to play a little bit of defense, and that's just the way it is. I would like that not to be the case. But I think that's just I think that's like the long term impact is, it requires a lot of defense. 

Chris: Sure.

Chris: Well, this is great. Before we wrap, let me ask you in the short term, and we've covered a lot of this, but in the short term, I know a level set has a lot of resources out there. What can your customers go to and use during these times to make sure that they're covered from a payment and overall kind of liability risk perspective?

Scott: Sure. So one, we have a COVID Resource Center that has a lot of information about the situation. We have an expert center where there's a whole network of attorneys.

Chris: I saw that, fantastic!

Scott: Right. And they're answering questions and giving legal advice like though, like we have a lot of a lot of people coming to us with questions and you can go post your question for free, you can get answers for free. Just go to our website levelset.com, you click on ask a question and engage with an attorney and get some of these things answered without having to spend money on that initially. The advice that I see coming across the wire, and this is like a short term answer, but what customers can do is they can follow lien. Yeah, and here's the deal. I have been spending the past 10 years telling people don't file liens. And trying not to and trying to avoid liens. Yeah. The advice from attorneys, and when I look at this is kind of unanimous if you have money on the street, now is the time to file a lien.  And it's not that you know, no, no hard feelings. It's not personal. It's that you have to be in line for payment in an environment unless you have a project that just has money flying through, don't file a lien, but look, everything else. Get in line for payment. The stampede is people running. The stampede is running, get in line and we're doing  discounted liens. We've cut our liens by more than like 50%. So we have $199 and includes the filing fees, the whole thing takes five minutes, and you can get your lien filed. So that's short term. You know, get advice. Get liens filed. 

Chris: That's great.Well Scott been great having you on. Really appreciate it. And, you know, let's look out for our customers together and hopefully this thing opens back up in the next few weeks.

Scott: Yeah, the sun will come out tomorrow. It's gonna be fine. We're gonna be good. Thanks for having me, Chris. 

Chris: All right. Thanks, guys.

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